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Exam 12: Relevant Costs for Decision Making

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Question 1

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Hobbins Corporation makes three products that use compound W,the current constrained resource.Data concerning those products appear below: Rank the products in order of their current profitability from most profitable to least profitable.In other words,rank the products in the order in which they should be emphasized.

A) UT,RC,DQ
B) DQ,RC,UT
C) RC,DQ,UT
D) UT,DQ,RC

E) B) and D)
F) A) and B)

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Question 2

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Zaccagnino Corporation makes a range of products.The company's predetermined overhead rate is $14 per direct labor-hour,which was calculated using the following budgeted data: Management is considering a special order for 300 units of product D03C at $119 each.The normal selling price of product D03C is $157 and the unit product cost is determined as follows: If the special order were accepted,normal sales of this and other products would not be affected.The company has ample excess capacity to produce the additional units.Assume that direct labor is a variable cost,variable manufacturing overhead is really driven by direct labor-hours,and total fixed manufacturing overhead would not be affected by the special order. Required: If the special order were accepted,what would be the impact on the company's overall profit?

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Direct materials,direct labor,and variab...

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Question 3

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The management of Drummer Corporation is considering dropping product D84L.Data from the company's accounting system appear below: All fixed expenses of the company are fully allocated to products in the company's accounting system.Further investigation has revealed that $201,000 of the fixed manufacturing expenses and $156,000 of the fixed selling and administrative expenses are avoidable if product D84L is discontinued. Required: What would be the effect on the company's overall net operating income if product D84L were dropped? Should the product be dropped? Show your work!

The Tolar Company has 400 obsolete desk calculators that are carried in inventory at a total cost of $26,800.If these calculators are upgraded at a total cost of $10,000,they can be sold for a total of $30,000.As an alternative,the calculators can be sold in their present condition for $11,200. -What is the net advantage or disadvantage to the company from upgrading the calculators?

Supreme Celery Corporation manufactures four celery based products.Floods and fire on the west coast are going to cause a shortage of celery for Supreme next month.Information related to the four celery products that it produces are shown below.The numbers relate to the cost per case and the amount of celery per case of product: To maximize profit next month,in what order would it be best for Supreme to schedule production (first to last) ?

Brubacher Company makes four products in a single facility.These products have the following unit product costs: The grinding machines are potentially the constraint in the production facility.A total of 20,500 minutes are available per month on these machines. Direct labor is a variable cost in this company. -How many minutes of grinding machine time would be required to satisfy demand for all four products?

The opportunity cost of making a component part in a factory with excess capacity for which there is no alternative use is:

Badal Corporation processes sugar beets in batches.A batch of sugar beets costs $55 to buy from farmers and $18 to crush in the company's plant.Two intermediate products,beet fiber and beet juice,emerge from the crushing process.The beet fiber can be sold as is for $20 or processed further for $16 to make the end product industrial fiber that is sold for $53.The beet juice can be sold as is for $33 or processed further for $23 to make the end product refined sugar that is sold for $60.How much profit (loss) does the company make by processing one batch of sugar beets into the end products industrial fiber and refined sugar?

An automated turning machine is the current constraint at Greenleaf Corporation.Three products use this constrained resource.Data concerning those products appear below: Rank the products in order of their current profitability from most profitable to least profitable.In other words,rank the products in the order in which they should be emphasized.

Kava Inc.manufactures industrial components.One of its products,which is used in the construction of industrial air conditioners,is known as K65.Data concerning this product are given below: The above per unit data are based on annual production of 4,000 units of the component.Direct labor can be considered to be a variable cost. -Refer to the original data in the problem.What is the current contribution margin per unit for component K65 based on its selling price of $180 and its annual production of 4,000 units?

Consider the following statements: I.A vertically integrated company is more dependent on its suppliers than a company that is not vertically integrated. II) Many companies feel they can control quality better by making their own parts. III) A vertically integrated company realizes profits from the parts it is "making" instead of "buying" as well as profits from its regular operations. Which of the above statements represent advantages to a company that is vertically integrated?

The management of Dorl Corporation has been concerned for some time with the financial performance of its product I54J and has considered discontinuing it on several occasions.Data from the company's accounting system appear below: In the company's accounting system all fixed expenses of the company are fully allocated to products.Further investigation has revealed that $95,000 of the fixed manufacturing expenses and $85,000 of the fixed selling and administrative expenses are avoidable if product I54J is discontinued. -According to the company's accounting system,what is the net operating income earned by product I54J?

One of the dangers of allocating common fixed costs to a product line is that such allocations can make the line appear less profitable than it really is.

A study has been conducted to determine if one of the departments in Parry Company should be discontinued.The contribution margin in the department is $50,000 per year.Fixed expenses charged to the department are $65,000 per year.It is estimated that $40,000 of these fixed expenses could be eliminated if the department is discontinued.These data indicate that if the department is discontinued,the company's overall net operating income would:

Isaac Corporation processes sugar beets in batches that it purchases from farmers for $47 a batch.A batch of sugar beets costs $14 to crush in the company's plant.Two intermediate products,beet fiber and beet juice,emerge from the crushing process.The beet fiber can be sold as is for $22 or processed further for $13 to make the end product industrial fiber that is sold for $42.The beet juice can be sold as is for $45 or processed further for $27 to make the end product refined sugar that is sold for $67.Which of the intermediate products should be processed further?

The Clemson Company reported the following results last year for the manufacture and sale of one of its products known as a Tam. Clemson Company is trying to determine whether or not to discontinue the manufacture and sale of Tams.The operating results reported above for last year are expected to continue in the foreseeable future if the product is not dropped.The fixed manufacturing overhead represents the costs of production facilities and equipment that the Tam product shares with other products produced by Clemson.If the Tax product were dropped,there would be no change in the fixed manufacturing costs of the company. -Assume that discontinuing the manufacture and sale of Tams will have no effect on the sale of other product lines.If the company discontinues the Tam product line,the change in annual operating income (or loss) should be:

All future costs are relevant in decision making.

A customer has requested that Daleske Corporation fill a special order for 2,000 units of product D84 for $20.30 a unit.While the product would be modified slightly for the special order,product D84's normal unit product cost is $18.50: Direct labor is a variable cost.The special order would have no effect on the company's total fixed manufacturing overhead costs.The customer would like modifications made to product D84 that would increase the variable costs by $2.50 per unit and that would require an investment of $7,000 in special molds that would have no salvage value. This special order would have no effect on the company's other sales.The company has ample spare capacity for producing the special order.If the special order is accepted,the company's overall net operating income would increase (decrease) by:

A sunk cost is a cost that has already been incurred but that can be avoided at least in part depending on the action a manager takes.

Rowena Corporation manufactures laser printers.Rowena currently manufactures the 32,000 imaging drums that it uses in its printers.The annual costs to manufacture these 32,000 drums are as follows: Hardware Solutions,Inc.has offered to provide Rowena with all of its imaging drum needs for $72 per drum.If Rowena accepts this offer,70% of the fixed manufacturing cost above could be totally eliminated.Also,Rowena will be able to use the freed up space to generate $240,000 of income each year in the production of alternative products. -Assume that demand for Rowena printers goes up from 32,000 annually to 40,000 annually.Also assume that Rowena has the idle capacity to produce the extra 8,000 drums needed for the printers.Under these conditions,would Rowena be better off to make the drums or buy the drums and by how much? (Assume that there is no change in cost structure. )